The formal definition of a Personal Guarantee is an agreement that makes one liable for one’s own or third party's debts or obligations.
In simpler terms, the first word, "personal," refers to you, the individual, and the owner of the company. It doesn't refer to your board members, your senior managers or any of your employees. In the case of a proprietorship, the owner and the business are one and the same in the eyes of the law.
The second word, "guarantee," means "a pledge or assurance." Therefore, the term "personal guarantee" translates to you providing your own individual pledge or assurance for an obligation. Depending on the exact wording of your financing documents, you are personally pledging that you will make good on the obligation, even if your firm or business organization provides limited liability protection under the law. The lender can go after your personal assets should you default on the loan. Importantly, many personal guarantees allow the lender to seek satisfaction of the debt from the guarantor without having to seek repayment from the debtor first.
Many lenders require a personal guarantee as an “added assurance” that the owner or executive is committed to the business and is committed to repaying loan. A personal guarantee demonstrates to a lender that you are a responsible business owner and intend to repay all of your business loans. From the lender’s viewpoint, if the owner isn’t willing to stand behind the business, then why should the lender take a risk?
Many small businesses have to examine the option of a personal guarantee to get a loan, so it’s imperative to review the documents with a trusted legal advisor and accountant to learn the consequences should the debt go unpaid. It's also very important that you seek expert legal advice about the specific laws of your state.